Trading What I See

Even though I still think we are in congestion, I found a trade this morning that was hard to resist. When I find a setup that has multiple reasons for an entry and allows a very close stop, it fits into my trading plan.

We started the day with a small pop to the upside, made a quick pullback, and then moved up to the session high at point “X.” We turned down at a 127% external retracement of the previous decline (15 minute chart — not shown). This is a very common turning point, but moving back into congestion doesn’t suggest a trade to me. But what happened next created a nice setup.

The bounce from point “A” couldn’t get through yesterday’s high (green line), and on the second try it was completing a small a-b-c (up-down-up) pattern. The measurement on the second upthrust was exactly 0.618 times the first up movement. That Fib ratio is the most likely to turn into a tradable move.

Some other reasons: a previous day’s high, low, or close will often create important support or resistance, and price is stalling in the area of the high and close. Moving averages will do the same thing, and we are hitting the 13 period (white) moving average, which has turned down.

All of this makes point “B” an obvious short sale setup. Now I’ll start looking for a place for my initial stop. As soon as we turn down I can use the pivot at “B”, the white moving average, or yesterday’s high — all will give me a reasonable risk/reward ratio even if we only drop as far as point “A.”

I’m showing something new on today’s chart — a faster Stochastic. I normally watch a 14 period Stochastic, since so many charting programs use that as a default. I want to be aware of what many other traders are watching. But when I’m looking for divergences in a very short timeframe, I’ll switch to a 5 period Stochastic. And you’ll notice that at point “B” there is a very clear divergence.

Multiple reasons for an entry with a close stop. And the eventual target is a Measured Move — the distance from “B” to “C” exactly matches the distance from “X” to “A.”

The next three hours were sideways, and it ended by forming a nice rectangle. Some might complain that the three bottoms didn’t line up exactly, but I like the pattern structure. What I didn’t like was we are going back into congestion again, and there was no pullback. Until we actually get some momentum behind these pokes into new high territory I’ll continue to be overly cautions in my trade selection.